Labor market and politics make us consider again ‘Whither the World?’

Multilateral institutions are fracturing, democracies are reeling, and a global trade war looms. In a scene that many Americans once thought unthinkable, an American president went to the United Nations to repudiate “globalism,” effectively encouraging all nations to act in their narrow national interests, without regard to global concerns.

Where will it all lead?  Forty years ago, New York Times columnist James Reston posed that question in a prescient piece entitled “Whither the World?” He noted some increase in international cooperation, but also warned that “nations are only beginning to recognize the changing nature of world problems…” Today the international order is under increasing strain and a growing segment of the world’s voters are opting for what Reston described then as the “delusive comfort” of protectionism and nationalism.

Will this rising tide of division and discord ebb? Or will the forces that gave rise to Brexit, Trumpism, and reactionary movements in Eastern Europe wash over the world like a rushing torrent, destroying the web of international commerce, disrupting the comity of peoples and nations, and imperiling global peace?

Much of the political discontent that now threatens the international order has its roots in stagnant wages and rising economic discontent. Over the past half century, the size of the world’s educated workforce has seen unprecedented growth. It began with the entry of the Baby Boomers into the labor force in the 1970s, followed swiftly by a sharp rise in the labor force participation of women in the Western economies. The emergence of Japan and the “Asian tigers” as global competitors further expanded the pool of educated workers available to fill manufacturing jobs, as did the breakup of the Soviet Union and the Eastern bloc. In the 1990s great leaps in the communications and IT sectors created more jobs, but also lowered barriers to entering the global workforce in India and other parts of the world.

This ballooning of the world’s skilled labor force spurred global economic growth, but in the U.S. and many parts of Europe, it also depressed wage growth and contributed to economic inequality. When workers are too plentiful, productivity gains are plowed into profits rather than wages.

In such circumstances the rich get richer while middle class workers struggle and grow increasingly resentful of foreign governments and foreign workers. Protectionist, nationalist, and even anti-environmental policies, counterproductive though they may be, gain traction. Demagogues find favor, and international partnerships, including military alliances, are severely tested.

In the decades ahead, the pendulum will swing back. Labor forces in Europe, North America, and many parts of Asia will shrink as population stabilizes and the workforce ages. The resulting labor shortage will boost the relative bargaining power of workers, and help diminish economic inequality.

If we are lucky, rising wages could cause demagogues to lose favor. But if we’re unlucky, automation in the next few decades will create widespread unemployment and dash any hope of higher pay or greater economic equality. Hostility towards government, both domestic and foreign, could gain strength, divisions could widen, and anti-democratic forces could rally.

Rapid displacement of people by machines could spawn a whole new generation of angry Luddites. The appropriate response to the challenges posed by competition and automation is greater investment in human capital. But, as we are learning, hard times do not always produce sound policies.

But whether they do or not, the coming contraction of labor forces in the emerging and advanced economies is almost certainly a good thing. If, as Elon Musk and other insist, artificial intelligence and automation are destined to displace large segments of the workforce, we should be especially grateful for a smaller labor force. The next round of automation, like earlier rounds, may ultimately produce more jobs than are destroyed. But there’s no denying that unemployment in the interim could be prolonged and highly disruptive, both economically and politically.

The shrinkage of labor forces in the decades ahead poses a fiscal challenge. No one can deny that. The U.S. and other countries will need to shore up their national savings and strengthen their retirement programs. But there is a lot more at stake here. Labor force shrinkage may be our best hope for increasing real wages, reducing economic inequality, and minimizing unemployment. It may also counter the rising tide of protectionism and nationalism that now threatens the peace, unity, and prosperity of the world.

It may be a decade or more, however, before workers see any relief from stagnant wages, if then. In the meantime, we must not allow political Luddites to divide nations, destroy international commerce, and abandon efforts to address greenhouse gas emissions and other environmental threats. Global trade and cooperation are not without their challenges, but in a world of shrinking resources and changing climatic conditions, we need to act in concert. Division is not the answer.

This op-ed by Population Institute President Robert Walker originally ran on October 3, 2018 in The Hill